Inheritance Tax Part 1 Flashcards
How are IHT transfers valued?
As how much of a loss to the estate they generate.
As an example, two vases together are worth £50,000, but individually worth £5,000.
If Ben gifts one of these vases, the loss to his estate is £45,000 (£50,000 - £5,000), because his estate is worth £45,000 less.
The remaining vase, within his estate, is worth £5,000.
What is meant by related property for IHT purposes?
Property owned by an individual can be related to that owned by a connected party, usually a spouse.
The rules are designed to avoid couples being able to split their ownership in an attempt to deliberately reduce the values for IHT purposes.
To avoid this being effective, HMRC can ‘aggregate’ all related property holdings. They effectively ignore the value of the ‘part’ and treat it as a proportion of the value of ‘all of the parts’.
As an example:
Ben owns 40% of the total shares of Bray Ltd. and Becky owns 30%. Ben’s shares as a minority shareholder are valued at £10,000. However, as when combined with Becky’s, their joint shareholding makes them majority shareholders.
For IHT purposes, say, their joint shares are valued at £35,000.
Ben’s shareholding would be valued at £20,000 4/7ths (40 shares / 70 shares)of the total £35,000 shareholding.
When would a transfer between spouses not be exempt from IHT? and what are the limits?
When a spouse is not domiciled in the UK, then transfers are not unlimited.
Transfers are limited to the NRB of the domiciled spouse making the gift and the non-dom allowance, which is also £325,000.
Total transfers between spouse and non-dom amount to £650,000.
What are the timeframes for a non-dom spouse electing to become dom and what does it mean?
Can elect to be domiciled in the UK within 2 years of spouse’s death, but this will mean she will suffer IHT on her worldwide assets in the future.
What is the criteria for ‘normal out of income expenditure’ to apply?
Any amount can be given away provided that it:
- is out of income
- doesn’t affect the donor’s ability to maintain their usual standard of living.
- is habitual or regular.
Remember 5% withdrawals from an investment bond represent capital not income.
What is an exempt transfer
PETs are transfers made by an individual to:
Another individual
A bare trust
A disabled trust
To identify a PET you do not need to concern yourself with amounts, you just need to consider the recipient of the transfer.
What needs to be considered when making CLTS and then the effect of CLTs on death of the donor?
At the time the gift is made, the cumulative value of gifts in the last 7 years needs to be established.
Any gift above the Nil rate band with be charged 20%.
If the donor dies, the values of the CLTs that were made within the last 7 years are re-assessed at death tax rates and, just like PETs, the tax bill could be tapered when a donor has survived for more than the 3 years.
For CLTs that had lifetime tax taken when they went into the trust, this amount can be offset against the tax bill for that gift on death. If the lifetime rate exceeds the tapered death tax due, there is unfortunately no refund of tax!
If the donor of a gift into trust pays the lifetime IHT of 20%, why does it need to be grossed up?
Any IHT payment by the donor, however, will mean that the gift to the trust was not only the capital/asset/property/cash that was put into the trust: as the donor is also paying the tax, the donor has made a net gift into the trust, and in addition to the net amount, has paid the IHT. The gross transfer is therefore the net gift into the trust and the tax.
if £100,000 cash was gifted into the trust, and the trustees paid IHT of 20% on the CLT, the tax would simply be 20%, so £20,000.
If this 100k gift was made by the donor then the 100k would be net after the IHT lifetime tax of 20%.
100k/0.8 = 125k
20% of 125 = 25k CLT tax
Consideration of transferring unused NRB to a spouse?
The percentage of the NRB that can be transferred is based on the prevailing NRB at the time of first death.
Once the transferable percentage has been ascertained, that percentage can then be multiplied by the prevailing NRB at the time of second death (i.e. £325,000 currently).
IT IS THE PERCENTAGE OF THE UNUSED NRB THAT IS BEING TRANSFERRED, NOT THE VALUE OF THE UNUSED NRB
The result is then added to the individual’s own NRB to arrive at the total applicable NRB.
what are the timelines for claiming unused NRB?
The claim should be made within
2 years of the end of the month in which the death occurs; or
3 months of beginning to act as personal representatives (if that is later)
How can unused NRB be transferred to unconnected parties?
Armelle marries Charles. Charles dies leaving his estate and NRB to Armelle.
Armelle marries Callum. Armelle dies leaving her £325,000 estate to her son. This is a non-exempt transfer and uses her full NRB.
Callum can claim Charles’ NRB as it has not been claimed or used. This means he has NRB of £650,000. He never met Charles.
Limit to inheriting NRB?
No one person is entitled to more than double the NRB applying at their date of death. Max you can have is £650,000.
Conditions for RNRB to be applicable to an estate?
individual dies on or after 6 April 2017
individual owns a home, or a share of one, so that it’s included in their estate
individual’s direct descendants such as children or grandchildren inherit the home, or a share of it
value of the estate isn’t significantly more than £2 million
What are the considerations for downsizing with regards to the RNRB?
If a home is sold or downsized on or after July 8th 2015, the residence nil rate band that was available in the ‘large’ house will still be available, even if the current house is less than that amount, as long as assets of an equivalent value are passed to direct descendants.
Tapering rules for RNRB?
The RNRB is reduced by £1 for every £2 that the value of the estate exceeds the threshold of £2,000,000.
This also applies to the transferring of the RNRB. If the first spouse had an estate over £2,000,000, the amount available to transfer can be reduced, even if it was completely unused on first death.
What is meant by death bed planning?
Reducing their estate to the £2M threshold with some last-minute gifts, to enable their estate to benefit from the ‘residential nil rate band’ of £175,000 per person. If a person dies owning assets worth more than £2M currently, their inheritance tax free residential nil rate band will be tapered away or even reduced to nil. Subject to any capital gains tax consequences, the person could consider making a gift to reduce his or her estate to below £2M to retain the residential nil rate band. Although these gifts will not be effective for inheritance tax purposes if the person does not survive them by 7 years, they will successfully reduce the value of the estate sufficiently to make it eligible for the residential nil rate band, and possibly also that belonging to their late spouse.
